My father always bought any land for sale along his farm boundaries. We often thought he was crazy to pay so much, but there wasn t a purchase he made that wasn t a smart move seen in hindsight. Most farmers could say the same thing, whether they bought or not. Today s land prices, however, have some farmers wondering if that still holds true.
When we bought our farm at Westlock, Alta., in 1993, it was the tail end of a longer period of poor commodity prices. A quarter of land sold for $75,000. Now my neighbours tell me someone is selling three quarters of land for $1,500,000. Yes, that s half a million a quarter. What s happened?
According to Farm Credit Canada s (FCC) annual farmland prices report from the spring of 2011: Cash crop producers lead buyer activity. Strong demand with limited supply made farmland a hot commodity due to its historic performance as a stable investment and its current income generating potential. The report cites low interest rates, high commodity prices, pent up demand and producers trying to maximize economies of scale as the driving reasons for the rise in prices.
There are two components built into the price of land. One is the production price. The other is the investment value. How much a farmer will pay for land depends largely on their view of these two components. What is it potentially worth to them? And the answer is as varied as the number of farmers. Value is determined as what someone is willing to pay for it, says Geoff Doell, of Growth Agri- Coaching Inc., at Westlock.
Some feel land should pay for itself, or it is too expensive. Doell asks his clients, Is the piece requiring subsidization from other income sources? If it is, then it s likely too high unless other factors are in play.
For many farmers, the current prices seem too high to justify the production of grain commodities. Loren Koch, who operates a mixed cattle and grain farm northwest of Westlock, says, There s no way you can expect productive values to pay for these land prices. You have to have another source of equity.
Many farmers look at the relation between land rent and purchase prices. If interest for land payments is the same or less than rent, then it makes sense to purchase the land if a farmer has the means to do so. If interest is higher, then maybe they should rent instead, given the option.
Paul de Champlain is a 28 year old farmer west of Westlock who rents much of his land. It is definitely getting harder to pick up land, he says. There is so much competition from bigger farmers. They have been in the business of farming a lot longer than I have and have much deeper pockets than I do.
Tim Kubinec, who moved to the Westlock area in 1992, from Three Hills, Alta., says, We farmers make the most money on the increase on land. Or did, he hastens to add. Rent helps your cash flow, but it s not an investment.
In a December 30, 2010 article for theWestern Producer,the late Adrian Ewins quotes University of Saskatchewan commerce professor Marvin Painter: As the Canadian farm sector continues to change, farmers must realize that they are real estate investors just as much as farm commodity producers. Production is still a large part of land value, but other factors are becoming more and more important.
BUYING INTO A BUBBLE?
There s a time to buy real estate, and a time to sit back. Many, both farmers and investors and their advisors, are worried that the bubble could burst, that the highs have been reached.
We ve seen it go from $800 an acre to $1,200, then go back down to $800, Kubinec says of land prices in Three Hills. I think this is a time when it will do that again. The last two jumps are too quick too much. I honestly think we re at the top of the bell a couple years will tell.
Koch feels there s still some room for prices to go up, but not like they have the last 20 years. Land prices in the Three Hills area have capped at around $3,000-$4,000 per acre. We ve been playing catch up.
So what are good reasons to buy land now? Land doesn t come up very often, says Maureen Kubinec, Tim s wife. Usually you get one chance at it and that s it.
It s a piece of dirt, Tim says. I like to look out the window and see my asset instead of getting a piece of paper.
Maximizing economies of scale can make good business sense. Richard Seatter of Triple WHEN ARE LAND PRICES TOO HIGH?
Creek Farm, north of Westlock, says, We found that just farming and enjoying the life, we were going broke. We had to get more land; then it started going up.
Koch says, I think if you own a good solid base that s basically debt free you have all kinds of leeway as far as a land purchase goes. But he cautions, If you ve got payments on land already, payments that would equate to rent or better, it s pretty hard to go out and buy something that is going to cost you $120 per acre in payments. One screw up and it s gone.
The Kubinecs too have some words of caution. Even if a farmer thinks they can afford to pay for a piece of land, they need to assess their risk. Sometimes a land purchase can be too risky. We don t know what the prices will be in 15 years, Maureen says.
It still does boil down to each individual, Kubinec says. Maybe you ve had three generations of people farming behind you, and if it s beside you, you won t care what it costs, but if you re a young person just starting, you have to be careful, he says. It could be the top of the bubble and if it breaks you ll be in trouble.
The demand for land is not just local it s global. Browsing the internet I found a site encouraging the Chinese to buy Canadian farmland: http://chinalandinvestments.com. Canada is the ideal country for investing in farmland for many reasons, it says. (For more on non-farmer land ownership, see next month s issue ofGrainews).
No one knows what will happen to land prices. If that quarter for half a million is beside yours and you have the means to purchase it, we ll all think you re crazy. But maybe a few years down the road we ll wish we d bought it. Or as one farmer said: I would walk away if someone offered me enough. Maybe it s time to be the seller, not the buyer?